Question & Answer

In June 2014, the board of directors for McElroy Enterprises Inc. authorized the sale of $10,000,000 of corporate bonds. Jennifer Grayson, treasurer for McElroy Enterprises Inc., is concerned about the date when the bonds are issued. The company really needs the cash, but she is worried that if the bonds are issued before the company’s year-end (December 31, 2014) the additional liability will have an adverse effect on a number of important ratios. In July, she explains to company president William McElroy that if they delay issuing the bonds until after December 31 the bonds will not affect the ratios until December 31, 2015. They will have to report the issuance as a subsequent event which requires only footnote disclosure. Grayson expects that with expected improved financial performance in 2015, ratios should be better. Instructions (a) What are the ethical issues involved? (b) Should McElroy agree to the delay?

Recall the various strategies that rival oligopolists can adopt. What parallels there are in union and management strategies?

Under what conditions is it appropriate for a business to use the composite method of depreciation for its plant assets? What are the advantages and disadvantages of this method?

On January 1, 2013, Nichols Corporation granted 10,000 options to key executives. Each option allows the executive to purchase one share of Nichols’ $5 par value common stock at a price of $20 per share. The options were exercisable within a 2-year period beginning January 1, 2015, if the grantee is still employed by the company at the time of the exercise. On the grant date, Nichols’ stock was trading at $25 per share, and a fair value option-pricing model determines total compensation to be $400,000. On May 1, 2015, 8,000 options were exercised when the market price of Nichols’ stock was $30 per share. The remaining options lapsed in 2017 because executives decided not to exercise their options. Instructions Prepare the necessary journal entries related to the stock option plan for the years 2013 through 2017.

What are the main distinctions between a traditional financial instrument and a derivative financial instrument?

The records of Ellen’s Boutique report the following data for the month of April. Sales revenue $99,000 Purchases (at cost) $48,000 Sales returns 2,000 Purchases (at sales price) 88,000 Markups 10,000 Purchase returns (at cost) 2,000 Markup cancellations 1,500 Purchase returns (at sales price) 3,000 Markdowns 9,300 Beginning inventory (at cost) 30,000 Markdown cancellations 2,800 Beginning inventory (at sales price) 46,500 Freight on purchases 2,400 Instructions Compute the ending inventory by the conventional retail inventory method.

Maher Inc. reported income from continuing operations before taxes during 2014 of $790,000. Additional transactions occurring in 2014 but not considered in the $790,000 are as follows. 1. The corporation experienced an uninsured flood loss (extraordinary) in the amount of $90,000 during the year. The tax rate on this item is 46%. 2. At the beginning of 2012, the corporation purchased a machine for $54,000 (salvage value of $9,000) that had a useful life of 6 years. The bookkeeper used straight-line depreciation for 2012, 2013, and 2014 but failed to deduct the salvage value in computing the depreciation base. 3. Sale of securities held as a part of its portfolio resulted in a loss of $57,000 (pretax). 4. When its president died, the corporation realized $150,000 from an insurance policy. The cash surrender value of this policy had been carried on the books as an investment in the amount of $46,000 (the gain is nontaxable). 5. The corporation disposed of its recreational division at a loss of $115,000 before taxes. Assume that this transaction meets the criteria for discontinued operations. 6. The corporation decided to change its method of inventory pricing from average-cost to the FIFO method. The effect of this change on prior years is to increase 2012 income by $60,000 and decrease 2013 income by $20,000 before taxes. The FIFO method has been used for 2014. The tax rate on these items is 40%. Instructions Prepare an income statement for the year 2014 starting with income from continuing operations before taxes. Compute earnings per share as it should be shown on the face of the income statement. Common shares outstanding for the year are 120,000 shares. (Assume a tax rate of 30% on all items, unless indicated otherwise.)

Under what circumstances would a transaction be recorded as a troubled-debt restructuring by only one of the two parties to the transaction?

Assume that a firm discharges waste into a river. As a result, the marginal social costs (MSC) are greater than the firm’s marginal (private) costs (MC). The following table shows how MC, MSC, AR and MR vary with output. 1 2 3 4 5 6 7 8 MC 23 21 23 25 27 30 35 42 MSC 35 34 38 42 46 52 60 72 TR 60 102 138 168 195 219 238 252 AR 60 51 46 42 39 36.5 34 31.5 MR 60 42 36 30 27 24 19 14 (a)  How much will the firm produce if it seeks to maximise profits? (b)  What is the socially efficient level of output (assuming no externalities on the demand side)? (c)  How much is the marginal external cost at this level of output? (d)  What size tax would be necessary for the firm to reduce its output to the socially efficient level? (e)  Why is the tax less than the marginal externality? (f)   Why might it be equitable to impose a lump-sum tax on this firm? (g)  Why will a lump-sum tax not affect the firm’s output (assuming that in the long-run the firm can still make at least normal profit)?

On December 31, 2010, Beckford Company issues 150,000 stockappreciation rights to its officers entitling them to receive cash for the difference between the market price of its stock and a pre-established price of $10. The fair value of the SARs is estimated to be $4 per SAR on December 31, 2011; $1 on December 31, 2012; $10 on December 31, 2013; and $9 on December 31, 2014. The service period is 4 years, and the exercise period is 7 years. Instructions (a) Prepare a schedule that shows the amount of compensation expense allocable to each year affected by the stock-appreciation rights plan. (b) Prepare the entry at December 31, 2014, to record compensation expense, if any, in 2014. (c) Prepare the entry on December 31, 2014, assuming that all 150,000 SARs are exercised.

Livesey Company has signed a long-term contract to build a new basketball arena. The total revenue related to the contract is $120 million. Estimated costs for building the arena are $40 million in the first year and $30 million in both the second and third years. The costs cannot be reliably estimated. How much revenue should Livesey Company report in the first year under IFRS?

Why do managers need to measure, monitor, and motivate performance?

What are some of the principal abrasive materials used in grinding wheels?

The state of Georgia recently increased its tax on a pack of cigarettes by $2.00.  What type of tax is this?  Why might Georgia choose this type of tax?

When the accounts of Daniel Barenboim Inc. are examined, the adjusting data listed below are uncovered on December 31, the end of an annual fiscal period. 1. The prepaid insurance account shows a debit of $5,280, representing the cost of a 2-year fire insurance policy dated August 1 of the current year. 2. On November 1, Rent Revenue was credited for $1,800, representing revenue from a subrental for a 3-month period beginning on that date. 3. Purchase of advertising materials for $800 during the year was recorded in the Advertising Expense account. On December 31, advertising materials of $290 are on hand. 4. Interest of $770 has accrued on notes payable. Instructions Prepare the following in general journal form. (a) The adjusting entry for each item. (b) The reversing entry for each item where appropriate.

Charles Austin of the controller’s office of Thompson Corporation was given the assignment of determining the basic and diluted earnings per share values for the year ending December 31, 2015. Austin has compiled the information listed below. 1. The company is authorized to issue 8,000,000 shares of $10 par value common stock. As of December 31, 2014, 2,000,000 shares had been issued and were outstanding. 2. The per share market prices of the common stock on selected dates were as follows. Price per Share July 1, 2014 $20.00 January 1, 2015 21.00 April 1, 2015 25.00 July 1, 2015 11.00 August 1, 2015 10.50 November 1, 2015 9.00 December 31, 2015 10.00 3. A total of 700,000 shares of an authorized 1,200,000 shares of convertible preferred stock had beenissued on July 1, 2014. The stock was issued at its par value of $25, and it has a cumulative dividendof $3 per share. The stock is convertible into common stock at the rate of one share of convertible preferred for one share of common. The rate of conversion is to be automatically adjusted for stock splits and stock dividends. Dividends are paid quarterly on September 30, December 31, March 31, and June 30. 4. Thompson Corporation is subject to a 40% income tax rate. 5. The after-tax net income for the year ended December 31, 2015, was $11,550,000. The following specific activities took place during 2015. 1. January 1—A 5% common stock dividend was issued. The dividend had been declared on December 1, 2014, to all stockholders of record on December 29, 2014. 2. April 1—A total of 400,000 shares of the $3 convertible preferred stock was converted into common stock. The company issued new common stock and retired the preferred stock. This was the only conversion of the preferred stock during 2015. 3. July 1—A 2-for-1 split of the common stock became effective on this date. The board of directors had authorized the split on June 1. 4. August 1—A total of 300,000 shares of common stock were issued to acquire a factory building. 5. November 1—A total of 24,000 shares of common stock were purchased on the open market at $9 per share. These shares were to be held as treasury stock and were still in the treasury as of December 31, 2015. 6. Common stock cash dividends—Cash dividends to common stockholders were declared and paid as follows. April 15—$0.30 per share October 15—$0.20 per share 7. Preferred stock cash dividends—Cash dividends to preferred stockholders were declared and paid as scheduled. Instructions (a) Determine the number of shares used to compute basic earnings per share for the year ended December 31, 2015. (b) Determine the number of shares used to compute diluted earnings per share for the year ended December 31, 2015. (c) Compute the adjusted net income to be used as the numerator in the basic earnings per share calculation for the year ended December 31, 2015.

What is dressing, in reference to grinding wheels?

Chippewas Inc. has decided to purchase equipment from Central Michigan Industries on January 2, 2014, to expand its production capacity to meet customers’ demand for its product. Chippewas issues an $800,000, 5-year, zero-interest-bearing note to Central Michigan for the new equipment when the prevailing market rate of interest for obligations of this nature is 12%. The company will pay off the note in five $160,000 installments due at the end of each year over the life of the note. Instructions (Round to nearest dollar in all computations.) (a) Prepare the journal entry(ies) at the date of purchase. (b) Prepare the journal entry(ies) at the end of the first year to record the payment and interest, assuming that the company employs the effective-interest method. (c) Prepare the journal entry(ies) at the end of the second year to record the payment and interest. (d) Assuming that the equipment had a 10-year life and no salvage value, prepare the journal entry necessary to record depreciation in the first year. (Straight-line depreciation is employed.)

Is it a valid criticism of perfect competition to argue that it is incompatible with economies of scale?

A resistance spot-welding operation is performed on two pieces of 0.040 in thick sheet steel (low carbon). The unit melting energy for steel = 150 Btu/in3. Process parameters are: current = 9500 A and time duration = 0.17 sec. This results in a weld nugget of diameter = 0.19 in and thickness = 0.060 in. Assume the resistance = 100 micro-ohms. Determine (a) the average power density in the interface area defined by the weld nugget, and (b) the proportion of energy generated that went into formation of the weld nugget.

What are the two basic methods by which the circuit pattern is transferred to the copper surface of the boards?

Cost function using high-low and regression; quality of cost estimates Following are sales and administrative cost data for Big Jack Burgers for four months:  Administrative cost is a mixed cost, and sales is a potential cost driver.   Required (a)          Using the high-low method, create a cost function for administrative costs. (b)          In your own words, explain why the high-low method might not be a good method for estimating the cost function. (c)           Create a scatter plot and add a trend line. After examining the plot, use your judgement to determine whether the cost is fixed, variable, or mixed. (d)          Perform regression analysis to create a cost function for administrative costs. (e)           Can we know for certain that the cost function from part (d) provides a good estimate for next month’s administrative costs? Why or why not? (f)           Discuss whether sales are an economically plausible driver for administration costs for Big Jack Burgers.(a)     Total revenue (TR) instead of quantity (Q) in the cost function because sales is a potential cost driver. Under the high-low method, the cost function is calculated using the highest and lowest values of the cost driver. First, the variable cost is calculated: ($68 333 – $43 333)/($1 132 100 – $632 100) = $25 000/$500 000 = 0.05  or 5% of sales   The fixed cost is determined by substituting the variable cost into one of the high-low data points: $68 333 = F + 5%×$1 132 100 F = $68 333 – $56 605 = $11 728   Thus, the total cost function is: TC = $11 728 + 5%×Sales   (b)        The high-low method uses the most extreme cost driver values, which could be outliers, that is, not represent the cost most of the time. That means that the cost function might not represent the actual cost, on average. Therefore, this cost function might provide poor estimates of future costs. (c)     Chart of data with trend line added by Excel; trend line extended to Y-axis (dashed line) using Word: It appears that the cost is most likely mixed. There is a general downward slope     (variable cost) that appears to meet the intercept enough above zero to suggest a    fixed cost. The upward slope of the line indicates that there are variable costs.   (d)     Following is the regression output. A t-statistic greater than 2 is often interpreted as meaning that the coefficient is significantly different from zero. Notice that the t-statistic for the intercept coefficient is 2.172, but the p-value is greater than 10% at 0.162. Based on the p-value, there is a 16% probability that the intercept (fixed cost) is not different from zero. Because this regression has few observations, the p-value result for the t-statistic is atypical. Additional judgement is required to decide whether it is appropriate to include a fixed cost in the cost function.             Analysis at the account level can be used to increase the understanding of this cost. If this cost pool includes items such as salaries and other fixed costs (insurance, etc.), the regression intercept can be used as an estimate of the fixed costs. Then, the cost function would be TC = $16 800 + 4.5% × sales. Alternatively, analysis at the account level might indicate that there are few fixed costs. In that case, fixed costs are likely to be zero and would be excluded from the cost function. Then, the cost function would be: TC = 4.5% × sales   (e)     Because of unforeseen changes in cost behaviour, a cost function may not provide a good estimate for the next month’s costs. The past costs used for estimation might not be representative, especially because so few observations were used in the estimation. Sales might not be the activity that drives administrative costs. There might be a change in business operations or in the economy that would cause future costs to be different than in the past. There might be a large discretionary component in administrative costs, causing fluctuations in cost that are unrelated to any cost driver.                     (f)      The cons of the high-low method as an estimation technique were discussed in Part B above. If there are only two or three data points, however, the high-low method may be the best option available. This method can be used in cases where there is not enough data to perform regression, and it can be further improved by adopting more representative data points than the highest and lowest values of the cost driver. If there are more data points, regression analysis incorporates all of the observations into the analysis. Therefore, the results rely on more complete information and provide a better estimate, on average. Both methods assume that the cost function is linear and that all data points come from a single relevant range. If these assumptions do not hold, then both methods may be unsuitable for estimating future costs. In addition, both of these methods assume that the data points are representative of future costs. Unusual cost items are assumed to continue in the future, and possible changes in costs such as those described in Part E are ignored.

What are the noteworthy properties of titanium?

The strength coefficient and strain-hardening exponent of a certain test metal are 40,000 lb/in2 and 0.19, respectively. A cylindrical specimen of the metal with starting diameter = 2.5 in and length = 3.0 in is compressed to a length of 1.5 in. Determine the flow stress at this compressed length and the average flow stress that the metal has experienced during deformation

Explain how a non-consolidated subsidiary can be a form of off-balance-sheet financing.